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Ed's Blog

Last week, the CFPB released a report showing that the landmark PIRG-backed Credit CARD Act of 2009 is saving consumers billions of dollars by helping them avoid penalty fees and unfair interest rate increases. There's still work to be done, of course, but the law ended some of the worst industry practices that included a variety of tactics to trick consumers into paying late. Then, the firms tripled their interest rates in addition to charging sky-high penalty fees. Even worse, the companies figured out a trick, called "universal default," to raise the rates of consumers who were never late. That 2009 Credit CARD Act, championed by Rep. Carolyn Maloney (NY) and Sen. Chris Dodd (CT), put an end to these practices. It also ended the practice of giving away free pizza on college campuses as an inducement to get students to sign up for cards that they couldn't afford to repay and required card companies to disclose the contracts with universities allowing them to target undergraduates for school-branded credit cards.

We joined CFPB director Richard Cordray, deputy diector Steve Antonakes, and several consumer and industry experts at a public hearing in Chicago on October 2 to discuss the report's findings. In my remarks, which begin at approximately minute 36:09 of the video, I describe how the credit card industry, driven by a more-profits-every-day-mentality exacerbated by misguided Wall Street deregulation in 1999, ratcheted down the thumbscrews on consumers. First they raised rates on late-pays, then they tricked other consumers into becoming late-pays, then they raised rates on on consumers who'd never been late, and then on everyone else. Congress finally took action, aided no doubt by the backdrop of the financial crisis and their own anger at the credit card industry, which had essentially promised Congress that if it passed draconian bankruptcy legislation -- which a PIRG-backed coalition including Professor Elizabeth Warren had fought for years until it finally passed in 2005 -- they'd be satisfied. They weren't.

"The law set standards for when late fees can be assessed. Congress established that credit card bills must be due on the same date each month and that card issuers generally cannot charge a late fee unless consumers are given at least 21 days to pay their bill. The law also established limits on how much can be charged in late fees. As a result, we found that the average size of late fees declined since the passage of the CARD Act. Based on the credit card accounts we studied, representing most of the market, we estimate that the average late fee decreased by $6 after the CARD Act took effect. That means that these consumers paid $1.5 billion less in late fees in 2012 than they would have paid had late fees remained at their pre-CARD Act levels. [...] We did find that annual fees and interest rates have increased since 2008, which indicates a shift from hidden back-end pricing toward more transparent front-end pricing that consumers can understand and evaluate more easily. Even more significantly, however, we found that the total cost of credit, which includes all fees and finance charges, declined between 2008 and 2012 by two percentage points."

The law also included many changes suggested in U.S. PIRG Education Fund's 2008 report The Campus Credit Card Trap. The CFPB report found, according to director Cordray:

"The CARD Act has provisions that were explicitly designed to better protect young consumers from getting credit cards they cannot afford. In the years prior to the CARD Act, it was often too easy for students to rack up credit card debt they could not pay back and damage their credit rating for years to come. When I was serving as the Treasurer of Ohio, I heard many bitter complaints from parents about the aggressive marketing practices on college campuses that targeted naïve 18-year-olds just away from home for the first time"

However, much more work must still be done to clean up the credit card marketplace. In particular, the marketing of unfair add-on products has been the subject of four major CFPB enforcement actions where companies were forced to return nearly $800 million in refunds to consumers. High-cost, low-balance fee harvester credit cards targeted at previously bankrupt consumers are also a problem. But enactment of the CARD Act was an enormous step forward to put money back in consumer pockets. Its success shows that good regulation makes markets work better. And now, with the CFPB as the consumer regulator for big banks, we can expect vigilance against new unfair practices.